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Showing posts with label direct. Show all posts
Showing posts with label direct. Show all posts

Sunday, March 15, 2015

Is There a Danger From A Nondirect IRA Rollover?



I have come to the conclusion that I do not like for folks to receive a check when they do an IRA rollover.

What are we talking about?

Say that you have an IRA at Fidelity and you want to transfer it to Vanguard. Another example is that you have a 401(k) with a previous employer, and you have decided to move out of the 401(k). In each case you are transferring money into an IRA, whether from another IRA or from an employer plan.  

There are two ways to do this:

(1)  Instruct Fidelity to send the monies directly to Vanguard. This is sometime referred to as a “trustee-to-trustee” or a “direct” rollover. Notice that you ever see the money, although you may feel the breeze as it rushes by.
(2)  Instruct Fidelity to send you a check and then you in turn will send the money to Vanguard.

Option two is fraught with danger, beginning with convincing Fidelity not to withhold taxes. They do not “know” that you are actually rolling the monies, and they do not want to be holding the bag if the IRS comes looking. If they withhold $1,000, as an example, you are going to have to reach into your wallet to transfer the full amount to Vanguard. Otherwise you will be $1,000 short, meaning that $1,000 will be taxable to you when it is time to file your taxes.

An equal or bigger danger is that the IRS allows you only 60 days to send that check on to Vanguard. Miss that deadline and the IRS will say that you flubbed the rollover, taxes (and perhaps penalties) are due and thanks for playing.

How do you get out of it? Well, you are going to have to formally ask the IRS for a waiver, and wait on the IRS to give it. This process is referred to as a “private letter ruling.” The IRS is issuing a ruling to you, and it is to you and you only (that is, “private.”)

Is expensive? It can be, not the least for a CPA’s time in drafting the thing. Depending upon the issue, the IRS might also charge you money, and that cost can go into the thousands.

How can you miss the 60 days? There seems to be an endless variety. One can get sick, have family emergencies, the financial institution can make a mistake. I have lost track of how many of these I have read over the years.

And now I am reading another. Let’s talk about it, as I can see this story sneaking up on someone.

The taxpayer – by the way, taxpayers in private letter rulings are anonymous. We need to give “anonymous” a name for this discussion, so we will call him Sam.

Anyway, Sam wants to move his IRA. He meets with an advisor, who cautions him that the “new” IRA trustee will charge for rolling the IRA. Sam would be much better off having the old trustee reduce everything to cash, and then sending the cash to the new trustee.

OBSERVATION: While the PLR does not dwell on it, there obviously are some difficult-to-sell assets in Sam’s IRA. It does not have to be anything esoteric – like platinum-plated gold from the moon. It could be something as simple as a non-traded REIT.

Sam contacts a representative of the old trustee and explains that he is rolling over his IRA.  He has opted to pursue option (2) above, and would they be so kind as to help him with the process. Not a problem, they say, although it might take a few months to reduce the IRA to cash.

And there is the first big red flag.


Sure enough, old trustee sends Sam checks – plural. Six checks in total, over a period of more than 60 days.

Second red flag.

Sam was clever though. Sam did not cash any of the checks, figuring that if he did not cash the check then the 60-day period did not start.

Sam finally sends all the checks over to new trustee, who realizes that there is a problem. What problem? The problem that the 60-day period does not work the way Sam thought.

New trustee contacts old trustee and requests that they issue a stop payment on the checks.

Good job.

You see, the stop payment means that the checks could not be cashed, rendering them not much of a check at all. Since they could not be cashed, the monies could never leave Sam’s old IRA, and the issue of a rollover becomes null and void.

There is one more step: getting the IRS to agree with the above line of reasoning.

Which Sam did with his private letter ruling (PLR).

And I suspect that the professional and filing fees for the PLR may approximate what the new trustee was going to charge for handling the transfer in the first place.

By the way, do you know how this should have been handled? By instructing the old trustee not to send a check until everything has been reduced to cash, and then to send one and only one check for the entirety of the account.

I know that, and you know that. But somewhere sometime someone will repeat this story. Which brings me to the conclusion that people should not do option (2) rollovers unless there is no other alternative.

It just isn’t worth the risk.

Monday, January 21, 2013

2012 Loophole on Age 70 ½ IRA Charity Contributions




I had a call last week on what the rules are for the 70 ½ IRA owner making a direct distribution to a charity.

You may recall that – if you are a certain age – you can make distributions – up to a limit - from an IRA directly to a charity. The age is 70 ½ and the limit is $100,000. Why would you do this? There are several reasons:

(1) The first, of course, is that you are charitably inclined and have the means to do so.
(2) Second, the distribution counts toward your minimum required distribution (MRD). You have to pull the money out anyway.
(3) Third, you get to omit the distribution from income.
(a) This doesn't increase your adjusted gross income, which could have bad side effects (such as raising your Medicare premiums).
(4) Fourth, there is no charitable deduction.
(a) Which is OK, as you leave-off both the income and the deduction. In fact, you are ahead in a state that does not allow for itemized deductions.

What is the issue here? The issue is that the IRA/charity option was one of those tax law provisions extended with the most recent tax bill - the one signed in January 2013. People may have intended to make a direct distribution to charity but did not do so, waiting for clarification on 2012 tax law.

There is a surprise in the tax bill. You can still write a check by January 31, 2013 to a charity and have it count toward 2012. Let's say that you took out $26,000 from your IRA in December and made contributions of $10,000 before year-end. You can write checks for the balance ($16,000) and recast the entire $26,000 as a direct distribution in 2012.

2013 becomes 2012? I am thinking time travel, and that makes me think of....


What if you distributed in 2012? There are two possibilities:

(1)   You distributed directly to the charity

This is the best answer. You leave both the income and deduction off your return.


(2)   You distributed to yourself

            Oh oh. There are again two possibilities:

(1)   You distributed to yourself in December
                                   
As long as you write a check to charity by January 31, the IRS will consider this a direct distribution in 2012.

(2)   You distributed to yourself before December

There is nothing you can do. You will have income and a corresponding deduction. Hopefully there will be no harm, no foul. In Ohio, however, there is harm, as Ohio does not allow for itemized deductions.

There will be yet another consideration in 2013. Remember the new ObamaCare taxes (the 0.9% Medicare and the 3.8% investment income)? Those kick-in at $200,000 or $250,000 of income, depending on whether one is single or married. Now you have a very real reason to leave that IRA distribution off your income for 2013. You DO NOT WANT your adjusted gross income to hit that $200,000 or $250,000 stripe.



Thursday, August 16, 2012

The IRS Draws Congressional Attention

The IRS itself has been in the news recently. Whether it is the ham-handed treatment of Section 501(c)(4) political/nonprofit groups or the shadow funding of ObamaCare, the agency has been drawing attention and criticism. Today we are going to talk about two recent studies requested by Charles Boustany (U.S. Rep – LA). He presently serves as the Chairman of the House and Ways Subcommittee on Oversight.
The first report is titled “There Are Billions of Dollars in Undetected Tax Refund Fraud Resulting From Identity Theft. It addresses identity theft, which has been the number one consumer complaint with the Federal Trade Commission for 12 consecutive years.

The IRS presently processes returns and issues refunds before receiving the information forms with which to crosscheck. For example, if someone receives his/her Form W-2 and files for a refund in January, the IRS is issuing that refund check before the underlying wage information has been received from the employer, much less integrated into IRS information systems. This weakness has been exploited and has become a virtual cottage industry in certain cities such as Tampa, Florida.

Consider what TIGTA discovered:
·         2,137 returns resulting in $3.3 million in refunds were sent to one address in Lansing, Michigan
·         518 returns resulting in $1.8 million in refunds were sent to one address in Tampa, Florida
·         23,560 refunds totaling more than $16 million were issued to 10 bank accounts;  2,706 tax refunds totaling $7.3 million were issued to a single account

This is real money. TIGTA estimates that the IRS will issue almost $21 billion in identity-theft refunds over the next five years.
TIGTA made several recommendations, including:
·         Taking advantage of the information reporting available to the IRS. Social security benefit information, for example, is available in December - before filing season begins. Whereas this is a fraction of identity fraud, it is a positive step.
·         The IRS uses little of the data from its identity theft cases to develop patterns and trends which could be used to detect and prevent future tax fraud. Examples include whether the return was electronically or paper-filed, how the refund was issued, and, if issued by direct debit, the account number or debit card number receiving the refund.
·         Allow the IRS greater access to the National Directory of New Hires (NDNH). NDNH is a national database of newly-hired employees. It includes an employee’s name and address as well as wage information. By referencing information from prior year tax filings, the IRS could correlate NDNH data to determine whether reported wage reporting and claimed withholding appear fraudulent.
·         Encourage banks and work with federal agencies to ensure that direct deposit refunds are made only to an account in the taxpayer’s name.
·         Limit the number of tax refunds issued via direct deposit to the same bank account or debit card.
NOTE: That recommendation seems obvious.

“Substantial Changes Are Needed to the Individual Taxpayer Identification Number Program to Detect Fraudulent Applications”

The second report is disturbing. IRS employees had contacted Congress directly about supervisor misconduct and potential fraud in a program that reviews and verifies individual taxpayer identification numbers (ITINs). Congress then called in TIGTA to investigate.

We should explain that an ITIN is an Individual Tax Identification Number. ITINs were started in 1996 as tax identification for individuals who may have U.S. tax filing requirements but are not eligible for social security.
How can this happen?
·         Consider a German businessperson who invests in and receives income from a Miami shopping mall
·         Consider a Nigerian graduate student attending the University of Missouri (many) years ago with yours truly
·         Consider my brother-in-law’s wife, who is English and married to a U.S. citizen 
An ITIN will allow one to open a bank account and file tax returns. For example, if one’s spouse is English and one lives in England, the spouse will need an ITIN to file a U.S. income tax return. The children – who possibly have never been to the U.S. – will need ITINs to be claimed as dependents on the U.S. income tax return.
OBSERVATION: This is one of the absurd consequences of the U.S. worldwide income tax regime. A U.S. citizen has to file tax returns, even if he/she has lived outside the U.S. for many years, has a family outside the U.S. and has no immediate plans of repatriating to the U.S.
When one finally obtains a green card, one can transfer work and wage information from the ITIN to the Social Security Administration.
One applies for an ITIN by filing a form (Form W-7) and attaching supporting documents to verify one’s identity and foreign status. A passport will satisfy both the identity and foreign status requirements. The IRS will otherwise accept a combination of documents, including a foreign driver’s license, a foreign birth certificate, a foreign voter’s registration, a visa or other IRS-listed documents. The process usually takes place through the mail, which means that no US-agency employee actually sees the person applying for the ITIN.
Unfortunately, ITINs have been swept-up in political battles. For example, there is fear that the IRS will share this information with Immigration, although the IRS is not permitted by law to do so. This may discourage people from obtaining ITINs, so the argument goes. On the other hand, there are states that will allow one to obtain a driver’s license solely with an ITIN, which seems a perversion of its intended purpose.
TIGTA goes into the IRS to investigate the complaints. Here are some of its findings:
·         IRS management is not concerned with addressing fraudulent applications in the ITIN Operations Department because of the job security that a large inventory of applications to process provides. Management is interested only in the volume of applications that can be processed, regardless of whether they are fraudulent.
·         IRS management has indicated that no function of the IRS, including Criminal Investigation or the Accounts Management Taxpayer Assurance Program, is interested in dealing with ITIN application fraud.
·         IRS management has:
o    Created an environment which discourages tax examiners responsible for reviewing ITIN applications from identifying questionable applications.
o   Eliminated successful processes used to identify questionable ITIN application fraud patterns and schemes.
o   Established processes and procedures that are inadequate to verify each applicant’s identity and foreign status.
Good grief! The IRS disbanded an ITIN team that was having too much success, countered by provided virtually no training to new hires and transfers and put negative evaluations in overly-eager reviewers’ files.
TIGTA made nine recommendations in this report. The IRS agreed with seven and has already announced plans to implement interim changes. One has caused quite the consternation in the immigrant community by requiring copies of original documents with ITIN applications.
OBSERVATION: Let’s be fair here: would you be comfortable sending original copies of anything to the IRS? Assuming you can find that birth certificate from the mother country, how are you going to replace it when the IRS loses the thing?